24/01/2017 by Frank Higginson – Director | Hynes Legal

Getting your business in order

Before you list your business for sale there are some key things you want to make sure are reviewed. Surprisingly enough, buyers will accept lots of things that could otherwise be issues if they are handled properly and presented correctly the first time. Buyers will often get upset (and lose trust), if their due diligence reveals things that they believe you should have told them. Buyers do not like surprises.

Make sure you address every one of the following issues before you go to sell.

Are your letting authorities signed by every owner?

Missing letting authorities are still the bane of every transaction. At law, if you do not have them you cannot charge a commission to the owner of the lot. Buyers (and their accountants) will ask for them. If they are not all there, be ready to be asked why. Depending on the buyer’s position you may be required to have them all signed by settlement or agree to an adjustment of the purchase price on settlement.

Are the letting authorities assignable? 

There are two separate forms under which letting appointments can be created. Before 1 December 2014 they had to be on a PAMDA20A. For those to be assignable you had to either:

  • Have section 4.4 which dealt with assignment ticked and initialled by all of the owners; or
  • If an earlier version PAMDA20A was used, the owners needed to agree to making the appointment assignable by a separate agreement or annexure.

If the appointment is on a PoA form 6 it is automatically assignable.

If an appointment is a PAMDA one and is not automatically assignable, that will remain the position under the PoA. For that appointment to be assigned you will need the consent of the owner, or to get a new appointment on a PoA form 6. If it is not assignable it may lead to the same issues as not having a letting authority form in place as mentioned above.

Do you have up-to-date sales figures?

Most buyers require a verification of figures to within two months of the date of the contract. It is very rare to find a financier that requires any less when assessing the income of the business for lending purposes. That is because there is little point assessing a deal on figures that are out of date.

Having sales figures that are (say) six months old means that there is more than likely going to be a

discrepancy between what you think the net profit is and what it verifies to when investigated by the

buyer’s accountant. This may lead to a price renegotiation if the figures verify to less than what you

suggested they would be in the contract. The other alternative is that if the income has increased, you may be selling for a lower price than you could be.

The other issue with having older sales figures is that buyers will sometimes lean towards making offers on buildings whose figures are more up to date. Put yourself in a buyer’s shoes. Imagine if you were looking at similar buildings, that were for all intents and purposes alike, but one had current figures and one had figures that were 12 months old. Which one would you prefer to make an offer on?

What is the status of the term of your management rights agreements?

You need to know the remaining term of your management rights agreements. This is very important to any buyer. If you do not have a long enough term left, you may need to top your agreements up  as part of the sale which will lead to additional costs and a potential delay. Whether you have a long enough term left will depend on the market at the time and which Module you are regulated by. You will need to be guided by your broker around what this will be.

Make sure you have exercised your options and documented those with the body corporate. Failing

to exercise an option can have substantial consequences.

Setting false expectations for a buyer on term can be fatal to a transaction. Know the term you have

to sell and if you are not sure, check before you list your business for sale.

Are there any body corporate issues?

Are you having a brutal battle with the committee? Are there building defects that have not been dealt with?

These issues will normally be revealed in the buyer’s due diligence when they look at the body

corporate records. If these types of issues are managed up front and disclosed to the buyer before

the buyer finds these out on their own, then the outcome will usually be a lot different to the position where the buyer identifies it during the due diligence process and then asks the question as to why they were not told in the first place. The key lesson here is to be up front with any major issues.

Are there any outstanding due diligence issues from when you purchased?

Were there certain things that your lawyers recommended should be corrected in the agreements

when you purchased? Have you done these? If not, be ready to have that same conversation with

the buyer. The commercial risk you accepted when you bought might not be acceptable to the buyer.

Are your agreements caught by the Gallery Vie decision?

A relatively recent decision at the QCAT has caused some concern amongst management rights

industry financiers. In general terms, if your management rights agreements include a right for the

body corporate to terminate them as a result of the bankruptcy or liquidation of the manager entity,

your agreements are caught by this decision. This may need addressing at either committee or

general meeting if your buyer’s financier needs it addressed. Negotiating these clauses is becoming

very important in most sales.

In summary

Understand what a buyer will look for and deal with it now. It is far easier to deal with the issue before you sign a contract rather than when you are half way through the sale process.

Frank Higginson
Direct:  +61 7 3193 0588 | Telephone: +61 7 3193 0500 | Fax: +61 7 3193 0599

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